2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
Market Worthiness:
An Institutional Reform Agenda for Urban Local Bodies in India1
Jessica Seddon Wallack2
v. March 18, 2012
1
I would like to thank Revati Dhoble for excellent research assistance and substantial contributions to an
earlier draft of this paper, and Sujatha Srinivasan as well as the members of the HPEC on Urban Infrastructure
for their comments on earlier drafts.
2
Jessica Seddon is Head of Research, Indian Institute for Human Settlements. This paper was written while she
was Director, Centre for Development Finance, IFMR
1
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
Urban Marketworthiness
Discussions of urban finance in India frequently come back to the question of why India’s
municipal finance markets remain so thin. Cities are in need of long-term infrastructure
finance and people are in need of infrastructure services. The prices being paid for real
estate in central locations, private infrastructure solutions, and other substitutes for
functional urban infrastructure clearly indicate willingness and ability to pay in some form.
Urban areas are getting richer, and citizen complaints about their surroundings and service
standard are become more vociferous – both forces that should accelerate both political
and private sector interest in working out ways to finance and implement projects to meet
urban citizens’ needs. While some authors have emphasized the need for supply-side
incentives for private finance to cities, and others note the effect of concessional public
sector finance on reducing cities’ incentives to seek private finance, the discussion nearly
always comes back to some discussion of cities’ institutional weaknesses in managing
finances and projects. In other words, even if cities had both incentives and supply-side
reforms motivated the private sector to seek municipal investments, urban local bodies
(ULBs) lack the capacity to access and use private funding sustainably.
This paper attempts to provide an analytically coherent list of key institutional
changes and city performance targets to measure progress toward building urban capacity
to effectively, efficiently, access private financial markets and convert these funds into highquality infrastructure and services. It introduces the concept of “Marketworthiness,”
defined as ULBs’ institutional readiness to access and use private finance for public ends.
Creditworthiness, or the ULB’s ability to reliably repay its debts, is at the core of
marketworthiness, but the performance metric adds several dimensions that are important
for urban policy and more general market resilience. First, it emphasises particular ways of
achieving financial creditworthiness, particularly from revenues that are elastic to urban
growth and service quality delivered to citizens. Second, it emphasizes the ULB’s ability to
convert finance into high quality infrastructure and services, rather than just financially
viable projects. Third, emphasizes that cities should have systems for quickly and easily
providing investors with adequate information to assess risk on an ongoing basis – ULBs
should not only be “creditworthy,” but also obviously creditworthy to the average
2
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
shareholder. Finally, it comprises a specific and detailed list of criteria for benchmarking
performance, unlike the broad assessments contained in city ratings using proprietary
methodology.3
Marketworthiness is an important concept for several reasons. It creates a
benchmark for sustained and sustainable financial soundness of municipal governments
rather than emphasizing a temporary condition, creditworthiness, that can be obtained
through financial structuring of particular deals or extraordinary institutional arrangements.
Many municipal bonds in India have improved their credit ratings on the basis of escrowing
specific revenue streams, guaranteeing intercepts of funds devolved from State Finance
Commissions, or other relatively costly financial structuring. These practices limit cities’
flexibility in managing revenues for other purposes and increase the cost of market finance.
Rewarding instruments’ creditworthiness without acknowledging the way it was achieved
creates stronger incentives for cities to continue with these practices rather than “graduate”
to be able to raise finance on more attractive terms – at least until budget constraints start
to bind and private finance ceases to be an achievement in and of itself. In short, market
worthiness can be thought of as the probability that a city’s financial instruments will be
found creditworthy. Cities that are well run will often be found creditworthy. Cities that do
not meet these conditions may be able to issue creditworthy debt with particular
structuring or under particular institutional arrangements, but are less likely to gain a good
rating time after time, issue after issue.
Marketworthiness’ integration of governance, financial, and infrastructure delivery
ability also provides a more fool-proof performance target for India’s cities than financial
creditworthiness. Financial ratios are easier to fudge than institutional characteristics, and
the more measured "performance" is used to determine some kind of reward, the more the
3
The city-level ratings reports carried out under JNNURM, for example, do not provide clear guidance on what
institutions are viewed as more conducive to financial stability and predictability, however. Their discussion of
non-financial information is highly subjective and it is difficult to determine the basis for the rater’s conclusion
of “adequate institutions,” or “sufficient manpower,” or other judgments related to a city’s ability to manage
its finances and projects. Ratings methodologies in general are trade secrets – while they are discussed in
overview notes, it is hard to determine the specific reward or change in the market view for any given city
action or institutional change.
3
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
incentive to manipulate accounts or take short-sighted actions to improve that particular
measurement.4
Marketworthiness’s emphasis on basic financial disclosure also encourages a
healthier market information ecosystem. The current opaque environment effectively
means that credit ratings agencies provide the main market oversight, a situation that tends
to be riskier than broader-based evaluation. A constant flow of information, beyond
periodic ratings assessments, is also essential for secondary markets since investors need to
track the changes in the value of the asset that they hold. Financial structuring and policy
commitments can be a way of removing fluctuations in value and eliminating the need for
constant monitoring and re-assessment, but this creates costly inflexibilities for municipal
management.
While the agenda laid out here overlaps with the reforms listed in the Jawarharlal
Nehru National Urban Renewal Mission (JNNURM) conditionalities, the Thirteenth Finance
Commission’s recommendations, and the priorities laid out in the Ahluwalia Committee
Report on Indian Urban Infrastructure and Services, it focuses attention on a few priorities
among the longer list.
Section 2 elaborates on the components of marketworthiness, disussing the steps
that cities and states must take to improve their ability to access private finance on
reasonable terms in more detail. It lists both the rationale for the list of key reforms as well
as specific indicators of progress toward marketworthiness. Section 3 discusses possibilities
for implementing the marketworthiness agenda. The first part reviews the current urban
institutional reform agendas embedded in the Jawaharlal Nehru National Urban Renewal
Mission (JNNURM), the Thirteenth Finance Commission, and the High Powered Expert
Committee on Urban Infrastructure, while the second discusses ways in which action on the
priorities for marketworthiness could be accelerated. Most of the changes required would
have to be state-level decisions and the political environment for these reforms is
challenging. Section 4 concludes.
2. Components of Marketworthiness
4
These behaviours have been seen across the world - in national accounts in European countries seeking to
sneak under the deficit limits for the Maastricht treaty, for example, in corporations attempting to boost their
quarterly earnings reports for shareholders, and other cases. There is no reason to expect ULBs to be different.
4
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
Marketworthiness (MW) includes three broad dimensions of urban performance:
predictable, sustainable revenues that are elastic to city economic and social development;
consistent ability to convert investment into high-return projects; and information
management for “ready reckoning” and reporting. The MW reform targets define
institutions and processes that affect cities’ ability to repay investments rather than their
willingness.5 It is a multi-dimensional comparison of cities rather than a single summary
index. The approach that does not produce a simple, satisfying ordering of cities from most
to least marketworthy, but it does enable benchmarking of strengths and weakness in
particular policy areas that city and state officials can control.
The Revenue Dynamics section includes both state and local institutions that affect
the link between revenues and economic development or project performance as well as
cities’ ability to raise and manage revenues. The Expenditure and Implementation section
focus on steps to improve city planning and management performance. Effective
implementation minimizes project risk, enabling cities to leverage market finance for their
priorities rather than being limited to accessing it for a subset of projects that can obtain
external guarantees. The Informational Infrastructure section includes institutions and
practices that support cities’ ability to provide timely, detailed, accurate information to
investors at low cost. Market oversight, the mechanism assumed to lead to ongoing reforms
and improved city management can only be effective if participants have easy access to
these details.
The MW framework seeks to define specific institutions and practices that cities and
states can implement to achieve broad goals such as being credit-worthy or financially
stable. There are some cases, however, where reforms required to achieve a particular goal
are necessarily city-specific and in these cases I propose an intermediate goal for cities to
achieve to become more marketworthy. Increasing coverage of property taxes, for example,
is one such challenge – the particular things cities need to do to ensure that a higher
fraction of eligible properties are actually taxed will vary from city to city. Rather than
5
The risk of unwillingness to pay is more applicable in the case of sovereign lending, in which there are no
higher political authorities to intervene in case of default, there are multiple lenders competing for business,
and there are diplomatic or other non-commercial reasons for lenders to resume credit to earlier defaulters.
The broader literature on sovereign and public sector debt emphasizes that credit risk depends on both, but it
is hard to foresee a situation in India in which an urban local body would be supported or encouraged to
default with impunity.
5
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
specify an institutional feature, progress on a specific outcome – higher coverage ratio – is
the reform goal that in turn contributes to broad financial stability. The list tries to strike a
balance between recommending specific steps that are precise but may be
counterproductive in particular city contexts, and broad goals that will make sense for every
city but for which the steps to attain the goals might vary across cities.
Indicators were chosen on the basis of normative considerations about the kinds of
institutions and practices that are likely to produce financially sound, predictable city
management, the revealed preferences of market participants, and the viability of the
indicator as a observable, monitorable performance metric. The public finance literature, for
example, provides insights into the kinds of revenue powers and federal arrangements that
are likely to give a city predictable, reasonably stable6 revenues that are a function of the
quality of city management and underlying economic activity.7 The institutional economics
literature gives a basis for identifying the features that are likely to support a city having
consistently good project performance.
Finally, I try to choose indicators that are under a ULB or state’s direct control. These
more valuable as a benchmark for reform incentive programs than outcomes that fluctuate
based on chance, larger economic and political trends, and other factors since there is a
clear link between city effort and reward. Systems that reward outcomes that are produced
by both effort and luck can actually discourage effort – when cities see that their costly
efforts might not get rewarded if they have bad luck, they may not expend the effort in the
first place.
Appendix 1 summarizes the marketworthiness reform targets discussed below.
2.1 Revenue Dynamics
Revenue Dynamics covers three main focus areas: revenue levels and expected
growth, liquidity, and administrative efficacy of collection.
2.1.1. Revenue Levels and Growth
6
Although, technically, stable doesn’t matter as much as predictable. If things are predictably unstable, this
can be managed through financial structuring.
7
Linkage of revenues to economic activity makes these somewhat more predictable, and leverages an entire
industry devoted to predicting economic activity.
6
ARV: Property tax is based on the
ARV, either the rent actually received or
2012.
and Municipal
Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
the “Marketworthiness
annual rent a property
may fetch
Mohanty,
and
Ravi
Kanbur,
eds.
Urban
Infrastructure.
Oxford University Press.
from year to year if let out to a
hypothetical tenant.
CVS: Property tax based on value of
land and building taking future
(possibly more intense) use into
account. Value of land typically based
on location according to rates set by
state government; building value also
based on characteristics of building
according to schedules set by state.
The institutions and practices discussed in
this section affect whether a city’s tax
regime provides predictable revenues that
grow along with the city’s development.
The indicators in the “collection ability
section”
UAM: Property tax is levied based on
the area of the property and the
neighborhood it is in. Some building
characteristics may also be taken into
account.
measure
cities’
ability
to
effectively value properties and collect
revenues due to them.
Property Tax System: Capital Value, Unit
Area Method, or Hybrid > Annual Rental Value
There is substantial room for property taxe revenues in India to become more buoyant.
Mathur et al (2009)’s study of the 35 largest cities in India found an average annual growth
rate of 7.9% in property tax revenues, over a time period in which the economy was growing
at 8-9% and urban land values in particular were increasing at least twice as fast in many
cities. “There is no evidence of this tax being a buoyant one,” the study concludes.8
Most governments in India use the ARV or UA method for property tax calculation. A
third method, Capital Value, has been implemented in 57 Nirmala Nagara cities in Karnataka
among others. Both unit area and capital value methods (and the hybrids that are emerging)
are more marketworthy than the ARV because they are better able to respond to
improvements in the property and surrounding infrastructure and thus grow with the city
and the neighborhood’s development. They are also more transparent to administer, as the
tax is based on concrete observable aspects of the property and neighborhood rather than a
hypothetical tenant. Actual rental agreements could, in theory, provide a basis for
administered tax based on ARV, but it is difficult to track these prices as there is no central
repository for either market information or actual contracts.
The ARV method’s ability to raise revenues is also affected by existing Rent Control
Acts as well as any legal precedents set for the “fair rent” as required by Rent Control
Mathur, O.P., Thakur, Debdulal, and Nilesh Rajadhyaksha (2009). “Urban Property Tax Potential in India,”
NIPFP Working Paper. July, 2009.
8
7
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
provisions. These rents are typically well below market value and do not adjust with changes
in the market. ARV is also vulnerable to ad hoc policy adjustments that affect its
predictability. Some states have attempted to increase the revenue taken in under ARV by
declaring commercial property to have higher value, considering seating capacity in case of
public entertainment venues and other means. These measures can be adjusted or repealed
as arbitrarily as they were imposed. State and local governments can still affect property tax
revenues under the other systems by adjusting the valuations for particular areas of the city
or building type or declaring new criteria, but there is a clear logical benchmark for these
changes to follow.9
Other Revenues: Diverse Base > Specific Levies, More Revenue > Less
Cities often have other revenue options that can be exploited including stamp duty,
cesses on various economic activities, service charges, user charges, income from municipal
properties, etc. “Marketworthiness” includes both having taxes that draw on a broader and
more diverse base of economic activity and using these options well.
The range of options is a matter of state policy, while the revenue collected from the
available taxes depends on collection efficiency and the underlying tax base. Cities’ revenue
potential can be summarized in two ways: actual per capita non-property tax revenues and
a comparative list of ULB revenue powers. The first is an outcome measure of performance
on non property-based taxes, the second provides a comparative assessment of the city’s
potential revenue capacity and will hopefully highlight interstate differences. Revenue from
octroi or other trade taxes should be clearly marked separately since these are subject to
cancellation by the centre or states without any clear compensation.10
ULBs’ ability to earn income from public land through property leasing or
partnerships in development could also be considered under this category, as could its
ability to leverage land values through betterment fees, impact fees, area-linked
development charges, or sale of development rights. Phatak (2009), however, cautions
against extensive reliance on land- or development right-based finance until some of the
9
Municipal Acts typically prescribe the frequency with which cities can update valuations of areas or building
types, only state governments can change the criteria for assessment.
10
This would significantly affect cities like Mumbai, where octroi are a major and growing contributor to
revenues.
8
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
policy and regulation-related distortions in urban land markets are removed.11 Some of the
obstacles to defining and levying these charges are also beyond ULB control.
Revenue predictability: More > Less
Cities’ revenue volatility stems from three (likely correlated) sources: volatility of
own revenues, volatility of the tax shares transferred from the state due to variance in the
underlying tax base as well as changes in the tax sharing agreement, and volatility of grants
from the state and centre. The federal context affects cities’ revenue dynamics, since
transfers from center and state account for a nearly half of urban local bodies’ revenues.
(Figure 1, at end of the paper.)
Most of these factors are already captured in the revenue indicators mentioned
above. The property tax indicators mentioned above give some indication of the extent to
which cities’ own tax income will change from year to year.
It is more difficult to identify institutional features associated with lower volatility in
state transfers to cities. One criterion would be whether states have constituted State
Finance Commissions that produce reports and recommendations based on clear evidence
and transparent analysis on a regular basis. However, the SFC recommendations to states
are not mandatory and the political convention of accepting them has not evolved. Percapita own revenue is the most feasible summary indicator of a city’s vulnerability to
volatility in transfers from higher levels of government.12
2.1.2 Liquidity/ Lack of Revenue Restrictions
Cities’ marketworthiness increases with their ability to manage revenues to deploy
to projects, services, or to repay investors. Cities have varying reasons for building up debt
and are likely to have diverse strategies for reducing it, so this section of the MW framework
sets outcome goals as well as institutional arrangements affecting revenue restrictions: debt
Phatak, V. (2009). “Charges on Land and Development Rights as a Financing Resource for Urban
Development,” India Infrastructure Report 2009. Oxford University Press.
12
The percent of own revenues is a more common indicator of fiscal autonomy, but this is misleading because
a higher percentage could imply a stingy state as well as a more robust city.
11
9
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
service, expenditure obligations imposed by Municipal Acts, and revenue-raising
restrictions.
Interest and Finance Expenses as percent of total revenue and the debt service
coverage ratio are two indicators of financial flexibility, as is the size of pension, gratuity,
and provident fund obligations for city employees as a percentage of revenue. Asymmetric
decentralization - devolution of service responsibilities before revenues - has also left cities
with other “unfunded mandates.” 13 ULBs’ obligations vary across states in accordance with
the state Municipalities Acts. ULBs are typically responsible for public markets, solid waste
management, birth and death registration and licensing for some professions, operations
and maintenance for roads, parking lots, parks, etc and other classic city functions, but some
states mandate more expensive “Mandatory Functions.” Kerala’s ULBs, for example, are
responsible for maintaining waterways and canals under their control. Karnataka’s ULBs are
not only responsible for managing and maintaining municipal water works, but also
constructing or acquiring new works necessary for a sufficient supply of water for public and
private purposes.” Bihar’s Municipal Act allows ULBs to delay or avoid some of its legal
responsibilities “having regard to its managerial, technical, financial and organizational
capacity, and the actual conditions obtaining in the municipal area,” but then the next
clause empowers the state government to direct the Municipality to perform any of the
responsibilities if they are postponed.14 Other states’ Municipalities Act envisages services
such as public transport and hospitals as obligatory, both of which may negatively impact
the credit profile of the ULB since these are often run with commercially unviable user
charges. States’ capital investment in urban areas also affects ULB financial flexibility since
ULBs are typically responsible for operations and maintenance of assets.
2.1.3 Quality of Administration
Cities’ ability to collect taxes in a timely manner is essential for marketworthiness.
City ratings report universally commented on cities’ collection and coverage ratios. It is
impossible to specify a single institution that would lead to greater tax collection ability in all
Rao, Govinda and Richard Bird (2010). “Urban Governance and Finance in India,” NIPFP Working Paper
2010-68 use the term “unfunded mandate” to describe many city responsibilities.
14
Government of Bihar (2007). Municipalities Act. Paragraph 45(1)-45(3). Available at
http://apps.biharurban.in/ActFile/BiharMunicipalActEnglish-2007(1).pdf, accessed March 16, 2012.
13
10
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
settings, however, so the city targets are a set of achievements as well as procedures:
improving collection and coverage ratios and reducing total outstanding arrears. The
percent of property tax income spent on collection may not be as readily available, but it
offers a way to measure administrative efficiency. Cost-saving measures such as
computerization of demand and collection notices or self-assessment (with some auditing
and punishment for non-compliance to ensure quality) could also be reasonable steps that
would improve administrative efficiency.
Market worthiness in revenue collection also depends on having a strong
informational infrastructure, including a full GIS database of properties that has been
updated in the past two years, computerization of demand and collection notices, and
mandatory reporting of the transactions used to assess property values. Property
transactions are, in principle, already all on record with the state as part of the
administration of Stamp Duty, but values are under-reported due to widespread tax
evasion. The coverage ratio, for example, is based on the estimated number of properties so
might be overestimated if a city had poor information on the total number of properties.
Property Tax System: Frequent Updates > Long Lags
Property taxes will only increase with urban improvements and provide a source of
recoverable returns on investment if there is a systematic method for updating both the
characteristics of properties and neighborhoods as well as the basis upon which value is
assessed. 15 The elasticity of property taxes to economic growth depends, in turn, on the
means of updating values and the frequency of updates to the valuation of properties
(assuming valuation parameters remain constant). Self-assessment with auditing or marketbased updates of valuation in cities with deeper property markets are have more potential
than city or state orders for updating to capture increases in property values.16
2.2 Information Infrastructure
15
More frequent updating could potentially create volatility as well as buoyancy. However, systems that
explicitly link property tax collections
16
Self-assessment is only as good as the city’s auditing capacity or ability to deter cheating. Market-based
updates depend on the depth of the market – whether there are enough transactions to provide frequent
updates – as well as on the city’s ability to track these transactions.
11
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
High quality urban financial management systems lower the transactions cost of
market finance in two ways. First, they make it easier to decipher the revenue dynamics
behind the overall balance by making the sources of revenue and expenditure commitments
more transparent. It is observed very often that the fiscal surplus of ULBs may be attributed
to the internal dynamics of local bodies to cut back expenditures in their functional areas.
Therefore, a surplus or deficit in the current or capital account as a basis for cross sectional
or temporal comparisons of ULBs becomes problematic. Second, they lower the transactions
costs of project-specific ratings.
Marketworthy cities will have institutions and processes in place to generate a
continuous flow of information at a granular level and make this transparent to market
players either evaluating new bond issues or valuing paper that they already hold. The
International Institute of Finance, for example, considers improvements in data standards to
be one of the key requirements for increasing the level and reducing the volatility of capital
flows to emerging markets. International funding for initiatives to improve transparency of
accounts and adherence to international standards for data collection, as well as encourage
countries to make more high-frequency data available with a shorter time lag has increased.
The MW reform goals focus on institutional steps to ensure comparability,
availability, and quality of city financial information.
2.2.1 Comparability
Comparability is a key part of market worthiness – investors must be able to quickly
assess a city’s position and compare it to others in order to make informed decisions. The
comparisons across ULBs also facilitate (hopefully productive) competition. Cities could
improve comparability by recording key financial data in English/Hindi as well as the local
language, adhering to common accounting guidelines by aligning fund codes with those
prescribed by the state and in the National Municipal Accounts Manual,17 for example.
2.2.2 Availability
17
These fund codes are not necessarily the best or the right codes, but they are a de facto standard that exists
that cities are already encouraged to meet.
12
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
Information could be made more available by requiring cities to be more timely and
frequent in disseminating four financial reports: balance sheet, income and expenditure
statement, cash flow statement, and key financial ratios as well as availability of a
comprehensive asset register. The income and expenditure as well as cash flow statements
should be reported quarterly or half-yearly in order to increase transparency of ULB
operations, while balance sheets and financial ratios be reported annually to indicate
financial sustainability of the ULB. Income and expenditure statements provide insights into
the ongoing investment activities, efficacy of tax collection and compliance, efficacy of
collection of user charges, composition of expenditure, and timeliness of state or central
transfers to the ULB – all of which are of interest to the market in order to understand
administrative efficacy and revenue risk. Cash flow statements also provide insights in the
quality of ULB financial administration well as the impact of state and national decisions on
ULB finances – ULBs’ ability to maintain adequate liquidity depends on both managerial
prowess and state/national predictability in devolution.
Cities could also increase availability of information by implementing accounting
systems to track O&M costs for each of the major service categories – water supply and
sanitation, solid waste management, public transport services - and make these available.
This is one of the ULB reforms required under JNNURM.
2.2.3 Quality
Cities can increase quality of information by implementing and strengthening control
systems for financial information. Most cities are audited by state-level Local Fund Audit
departments, so one step would be to ensure that these offices are fully staffed with trained
accountants and have the legal powers to request detailed information from cities. This
would be a state-level reform.
Cities that have automated financial management systems, in particular those that
have created a “zero paper” environment in which revenues, expenditures, and
commitments are logged directly into the financial accounting system rather than recorded
13
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
by hand and transcribed, are also considered more market worthy. The direct recording of
transactions and automation of systems limits room for fudging or errors.
2.3 Implementation & Maintenance Capacity
Cities will not be able to access and utilize market funds consistently without developing
their ability to formulate and implement projects. Return on investment is a function of
managerial and implementation capacity at the ULB level. The MW framework includes
outcomes such as provision of high-quality infrastructure and services, on time, within
budget, and at reasonable cost, as well as institutional targets to ensure that this degree of
efficacy is sustainable rather than the result of a one-time push or a limited run of good
luck.
2.3.1. Institutions
Cities can improve institutional quality through staff changes, revising institutions, and
improving information flow. Increasing the number of engineers and planners on staff is one
target. Regularity of elections and the average tenure of the Commissioner or top
bureaucrat create a more stable working environment. Both of these are mentioned in the
literature as important considerations for credit ratings reports, though neither seems to be
the focus of city ratings reports. Having institutions such as the District or Metro Planning
Committees that are specifically tasked with planning for the ULB and its surrounding areas
is also important. The institutional underpinning for improved information flow includes
well-defined functionary and field codes and creation of an MIS to deliver various progress
reports on an ongoing basis.
Several of the MIS reports listed in the National Accounts Manual are important
elements of information flow for effective decision-making.
Name
of
Report
Performance
Statement
MIS Frequency
Preparation
Monthly
of Usefulness
Compares the income and expenditure of
ULB on monthly, quarterly and yearly basis
with the corresponding previous year’s
14
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
figures. This will enable the ULB to analyse
the performance of the current year by
comparing it with the corresponding month
of the previous year, the previous month (s)
of the current year. This comparison can also
be made against the budget.
Function
wise Quarterly
This statement provides function wise
Budget Utilisation
information
about
actual
revenue
Report-Revenue
expenditure incurred against budget. This
Expenditure
would help in analyzing the actuals vis a vis
the budget for each function. This can be at
the overall ULB level or drilled down to ward
or zonal level depending upon the extent of
data being captured in the system.
Function
wise Quarterly
This statement provides function wise
Budget Utilisation
information about capital expenditure
ReportCapital
incurred against budget. This would help in
Expenditure
analyzing the actuals vis a vis the budget for
each function. This can be at the overall ULB
level or drilled down to ward or zonal level
depending upon the extent of data being
captured in the system.
Source: National Municipal Accounting Training Manual for Elected Representatives and Top
Management, Ministry of Urban Development, GoI, November 2007.
Cities can also improve the information process by implementing an official public
grievance process in which complaints are provided to departments for incorporation into
their work plans.
2.3.2 Outcomes
Administrative efficiency
The steps toward administrative efficiency will vary across ULBs, but three financial
ratios: administrative expenses to total income, the ratio of establishment expenses to total
income, and operations and maintenance to gross fixed assets, can be used to gauge the
success of whatever steps cities do take. In the absence of a clear target for these indicators
– lower is generally better, but not too low – one way to set targets would be to benchmark
cities’ performance against other ULBs of a similar size for the first two and all ULBs for the
second. The assumption is that city size affects that scale of the service, which in turn affects
15
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
the appropriate human capital/capital ratio on providing services.18 The ratio of O&M to
gross fixed assets is less likely to be scale-dependent. Outliers on both sides are
problematic: too low means that assets may not be properly kept up, too high means that
they may be ineffectively kept up and constantly breaking down.
Administrative efficiency could also be measured by looking at unit costs of some
common infrastructure or services provided, such as cost per
Establishment
expenses: Salary,
wages, pensions, etc.
streetlight, or cost per kilometer of road. Unit costs should be
used cautiously as a reform benchmark, and only for activities
that that are relatively easy to audit; otherwise cities might have
Administrative
Expenses: Rent, rates,
office maintenance,
etc.
Operations &
Maintenance: Power
& fuel, consumption
of stores, repairs and
maintenance, etc.
an incentive to misrepresent activity or assignment of staff time
in order to meet targets.
Market worthiness does not include operations and
maintenance to total income as a target. This is in order to avoid
creating any disincentive to maintain existing infrastructure and
services rather than create new ones. Political compulsions and
the structure of devolutions to cities tend to motivate capital investment where
maintenance may be a more effective use of funds.
Project Management
Project management targets could rely on indicators often reported by the Ministry
of Statistics and Programme Implementation to indicate the quality of central government
project management: average and frequency of cost overrun for investment projects, and
average and frequency of time overruns. The utilization rate of funds from centrally
sponsored schemes could be another indicator of project management ability, although
these data would have to be adjusted to account for issues such as inability to raise cofunding, state delays, or other factors beyond project management. Placing too much
weight on utilization rates, however, could have perverse incentives unless other
monitoring prevents cities from squandering the funds.
18
Geographic dispersion may also affect the model for service provision; we may consider this if there are
many cities of similar size but varying population density.
16
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
Infrastructure and Service Quality
The third set of outcome measures, service quality, could be based on ULB on a commonly
agreed-upon service standard. The 2008 Ministry of Urban Development Service Quality
norms, for example, have been endorsed by the Thirteenth Finance Commission as
benchmarks for assessing ULB performance for incentive grants and were used by the
Ahluwalia committee as the basis for estimating investment requirements. (Table 1)
There are two challenges in implementing this indicator: first, measuring city
performance, and second, ensuring that the rating is actually sensitive to city effort and
innovation in providing services. According to raters and rating methodology, judging
performance or efficiency on the basis of output measures like service delivery levels is
challenging due to inadequacy of standardized and comparable data across municipalities.
Raters noted that the outcome information was often the most difficult to compare across
cities as well as the most difficult to audit and evaluate. ULBs’ management information
systems will have to be upgraded in order to even assess performance.
Incremental city performance could be assessed separately in each of the major
categories of service provision: water supply, sewerage and sanitation, solid waste
management, public transport, traffic support infrastructure, and street lighting. In order to
prevent a large cluster of outcomes near zero, any program to encourage cities to improve
project management could calculate partial progress toward the targets.
Still, service provision has the potential to be a sticky indicator of city administrative
capacity, however, under-rewarding cities that have seen a recent improvement in
administrative capacity and over-rewarding those whose capacity is declining or whose
infrastructure is particularly good for reasons beyond ULB efficacy. It is also likely to be
correlated with city wealth. One adjustment might be to report improvement in service
levels per year. The Thirteenth Finance Commission’s approach of asking states to work with
local bodies to declare service standards that they can commit to meeting is another option.
Success in fees and user charges are a second way to measure quality of outcomes,
since these are the market test of quality of services. The ULBs’ ability to recover cost can
only be realized if there is a simultaneous effort towards improving the quality of service
delivery which best fits the assessed requirements of ground realities, efficiency in
17
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
operations and management, and regular monitoring and systemic check-ups. The measure
is flawed, however, because ULBs may choose to finance services through broad-based
service tax levies on top of property taxes, or by adjusting the area-specific property tax
rates rather than adopting a more targeted user fee model, even if they can. This may also
reflect their assessment of the most sustainable, administratively efficient way to collect
revenues given their city’s infrastructure.
One proxy could be measuring collection efficiency of user charges for water. This is
one of the services for which tariffs are the economically sensible approach and desirable to
encourage conservation. The assumption is that collection efficiency is higher when citizens
are more willing to pay for the service.
3. Implementing Marketworthiness
The marketworthiness agenda is a subset of the reforms outlined in the Report of the
Second Administrative Reforms Commission (2005), the Jawarhalal Nehru National Urban
Renewal Mission (JNNURM) as well as more recent reports such as the Thirteenth Finance
Commission and the agenda laid out in the Ahluwalia Committee report. The depth of
intention to enable and motivate cities to be marketworthy (as well as better planned, more
inclusively governed, and more effectively serviced) is thus clearly stated; the challenge is
how to actually ensure that the reforms, particularly those that require state government
changes, happen. Implementing market worthiness will be politically and operationally
challenging.
The Political Challenge
State policies within their constitutionally recognized domain of responsibility for “local
body governance” are the main political challenges. The 74th amendment calls for
devolution, but even if fully implemented and enforced, states retain control over revenues.
While efforts such as the JNNURM’s mandatory state reforms and the Thirteenth Finance
Commission’s proposed performance grants create financial incentives for states to
undertake changes that would improve the Revenue Dynamics component of
18
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
marketworthiness, the constitutional amendments on revenue powers recommended in the
Ahluwalia Committee may be the only real way to achieve real progress.
Individual city rating reports for JNNURM clearly note the extent to which state laws
affect city creditworthiness in their ratings methodology, and the general notes on ratings
methodology emphasis states’ dominance in their positioning of state creditworthiness as a
kind of “sovereign ceiling” on urban local bodies. ICRA (2005), for example, notes that
“[Attention to state creditworthiness] follows the fact that all ULBs are
constituted under a State legislation that determines the legal framework
within which the ULBs would function. The legislation (usually called as a
“Municipality Act”) would define, among other things, a ULB’s
constitution, its range of obligatory and discretionary functions, its
revenue raising powers, and the nature and extent of support it would
receive from the State government. Also, this legislation can be altered
only by the State legislature. In addition, according to the Constitution, the
States are obliged to devolve a portion of the net proceeds of their taxes,
duties, tolls and fees to the ULBs, on the basis of the recommendations of
the State Finance Commissions (SFCs). While such devolutions form an
important component of the total receipts of ULB, ICRA also notes the fact
that
the
SFCs’
prescriptions
on
the
extent
of
transfer
are
recommendatory, and ultimately the extent of transfer is decided by the
Legislature (which effectively means the State government). Thus, ULBs
are reliant to a large extent on the State government for both their
financial and operational autonomy. Although States cannot directly
appropriate any surplus generated by a ULB, they can limit the ULB’s
autonomy by setting terms for inter-governmental transfer, revenue and
expenditure responsibility; allocating/ redistributing tax authority; and
mandating spending. Also, a ULB’s credit quality depends on the larger
macroeconomic environment prevailing in the State, which in turn is
influenced by the policies of the State government. As a result of these
factors, in ICRA’s opinion, the credit quality of a ULB is closely linked to
that of the State.” (ICRA, 2005)
19
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
Fitch (2008) writes:
The institutional framework, whether centralised or decentralised,
influences the subnational’s operating revenue structure. In order to
assess it, Fitch looks at the following: The amount of the transfers and
their relative size in the subnational’s operating revenue; Whether
transfers are earmarked for specific purposes or can be used to fund
operations and debt service; Revenue sources legally delegated to the
subnationals; The flexibility of the subnational to adjust its tax revenue
budget to a changing economic environment; and the legal and political
risks associated with any national revenue‐sharing system and the
direction of any changes in the system (toward more or less
decentralisation).
With respect to the legal and political risks, Fitch recognises that
federal structures are dynamic over the long term, but that the shifts may
influence fiscal balances in the short term. The institutional framework
influences the operating expenditure structure of the subnational and
Fitch considers the following factors: The size and type of mandated
expenditure (eg public health, public education, or public transport);
Whether operating expenditure may be funded by user charges, fees and
taxes delegated to the unit, or earmarked revenue from another unit of
government; Whether the subnational can adjust its expenditure budget
effectively to a changing economic environment; and Socio‐economic
trends underpinning the demand for public services (eg if population
growth is straining the supply of public services).”
20
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
JNNURM’s mandatory reforms for states, even if fully implemented, would not substantially
improve marketworthiness. The rationalization of stamp duty and reforms in rent control
JNNURM Mandatory State-Level
Reforms
 74th CAA (Transfer of 12th
Schedule functions,
Constitution of a DPC and
MPC)
 Transfer of City Planning
Functions
 Transfer of Water Supply &
Sanitation
 Reform in Rent Control
 Stamp duty rationalization to
5%
 Repeal of the Urban Land
(Ceiling and Regulation) Act
 Enactment of Community
Participation Law
 Enactment of Public
Disclosure Law
and the ULCRA could improve property tax
revenues and administration, but this is one
component of the revenue dynamics agenda.
The transfer of responsibility for water and
sanitation could worsen ULBs’ credit profiles
without complementary reforms that increase
revenues and ensure more predictable flows.
Creation of Metropolitan and District Planning
Committees (MPCs and DPCs) could improve
expenditure and infrastructure delivery, but only
if these are well-funded, fully-staffed, and have
clear and clearly enforced jurisdictions relative to
other state and local authorities. The mandatory
reforms do not address states’ effective control
over ULB revenues and their dynamics, nor do they require states to invest in urban
information systems or capacity-building and capacity transfer. It is also striking that a
program launched in 2005, more than a decade after the constitutional amendment, would
have to make implementation of that amendment a conditionality for investment.
The Thirteenth Finance Commission’s proposal for performance-linked grants does
include some measures that would improve revenue dynamics if states respond to the
pressure, but it is unclear whether the performance grants offer sufficient leverage. The
performance-linked portion of the grant to states on behalf of local bodies requires states
to, among other things set up an electronic system for automatic transfers of grants from
the commission to local bodies within five days of receipt from the Central Government, lay
out clear criteria for membership in the State Finance Commissions in an act of legislation,
“fully enable” local bodies to levy property taxes and remove “all hindrances” to their doing
so, set up a Property Tax board to look into property enumeration and valuation, and
declare service performance targets. The electronic system and professionalization of SFCs
will help increase revenue predictability, while the devolution of authority over property
21
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
taxes could be used to improve administration. Ideally the proposed Property Tax Board
would design the taxes to be more responsive to changes in property value, although it is
not clear why a state board would be interested in this if revenues remained with ULBs.
The Ahluwalia Committee’s recommendation to introduce a local bodies finance list
in the constitution and empower ULBs with exclusive taxes as well as amend the
constitution to require states to share a pre-specified percentage of their revenues from all
taxes on goods and services is the strongest statement yet, but it is unclear how this will
fare politically. Marketworthy ULBs with substantial revenue autonomy would be potential
political challengers, and states’ history of dealing with potentially powerful local entities is
not encouraging.19
Operational Challenges: Information Infrastructure and Expenditure and Implementation
Capacity
Building the information infrastructure and expenditure and implementation capacity are
operational challenges. Change in these dimensions of marketworthiness is already
underway: according to the Ministry of Urban
Development (cited in the Thirteenth Finance
JNNURM Mandatory ULB Reforms

Commission Report) local bodies’ expenditure
has increased in the recent past due in part to

additional investments in accounting systems,
computerisation
of
operations,
tax
administration, and project monitoring. The
Finance Commission’s record of its conversations
with local bodies also notes their demands for
more investment in information systems for tax
administration and service delivery.
These dimensions of marketworthiness
could improve further with expansion of the
19




Adoption of accrual based dualentry accounting
Introduction of e-governance
using GIS, MIS for various
urban services
Reform of property tax with
GIS and increase in collection
efficiency to 85%
Levy of reasonable user
charges so that full cost of O&M
is collected over 7 years
Internal earmarking of budgets
for provision of basic services
to the urban poor.
Provision of basic services to
the urban poor including
security of tenure at affordable
prices.
Chapters 6 and 7 of K.C. Sivaramakrishnan (2011). Revisioning Indian Cities: The Urban Renewal Mission.
New Delhi: Sage discuss some of the politics of preceding the 74 th Amendment.
22
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
JNNURM mandatory reforms for ULBs and implementation of the Finance Commission’s
recommended performance grants. The JNNURM mandatory reforms for ULBs already
include upgrading accounting practices, implementing e-governance and MIS for urban
services, GIS systems for property tax collections, and other arrangements to increase
collection efficiency.20 The Thirteenth Finance Commission’s proposed performance-linked
grants specifically include some of the elements of the marketworthiness agenda, including:
implementing an accounting framework for all ULBs consistent with the accounting format
and codification pattern suggested in the National Municipal Accounts Manual, putting in
place an audit system for all local bodies, and declaring service performance targets. The
audit system will presumably help make more of the financial ratios and other information
mentioned in the marketworthiness indicators available to the general public.
Still, the state of subnational finances as recorded by the Thirteenth Finance
Commission is a sobering reminder of the challenges ahead. According to them, “There are
significant discontinuities in data relating to revenue and expenditure of local bodies
submitted by State Governments to FC-XI, FC-XII, and to this Commission. These
discrepancies detract from the credibility of the data. Unfortunately, successive Finance
Commissions, including our own, have been unable to independently verify the data
provided on local bodies. The need to put in place a system where financial and
performance data of local bodies can be audited and confirmed credibly cannot be
overemphasised. Ten years have elapsed since FC-XI underlined the need for maintaining a
database as well as up-to date accounts and made a provision for supporting State
Governments in addressing these shortcomings. Five years have elapsed since FC-XII
highlighted similar inadequacies and made similar recommendations. Much has been said
by the earlier Finance Commissions on this important subject. Despite this, little
improvement has been noted in the situation. While we recognise, appreciate and support
the recommendations of the previous Commissions on the issue of data bases, accounts,
and audit, clearly an alternative approach may need to be adopted to address these issues
beyond funding support for these initiatives.” (Report of the Thirteenth Finance
Commission, Para 10.93, 10.94)
20
The JNNURM mandatory reforms do not require any specific performance on revenue collections, however,
a point noted by the Thirteenth Finance Commission’s in its suggestion to introduce conditionality in JNNURM
to close the gap between market and assessed values of properties.
23
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
The Ahluwalia Committee’s emphasis on capacity-building in addition to incentives
could be such an approach. The report calls for Reform and Performance Management Cells
including a dedicated Municipal Information Unit to “collect, collate, and analyse
comparable data on municipal services and finances on an annual basis” (xxxi) to be set up
for the GoI, state, and large cities. The report calls for building up the domestic training
capacity, as well as creating pathways for professionals to come into service through a
municipal cadre within the IAS that has competitive recruitment and selection.
Combining and recommendations from these reports and programs into a single,
widely applied, incentive and capacity-building effort by the Union government could
accelerate marketworthiness in several ways: First, it would separate marketworthiness
from other urban reform goals and enable incentives to be more clearly targeted and
enforced. It could be more politically palatable to withhold performance grants for
implementing accounting systems and GIS for property taxes than to stop investments that
also go into anti-poverty projects and infrastructure. Second, such a program could
potentially expand the coverage of the program from JNNURM cities and go beyond the
Finance Commission’s grant to states to offer investment incentives for cities as well. Third,
a coordinated program could also ensure that the investments in information infrastructure
are somewhat standardized so that comparable information on city finances, performance,
and structure were more available.
5. Conclusion
This paper has outlined an analytically coherent list of urban reform targets for achieving
market worthy cities, or cities capable of consistently and sustainably accessing private
finance to develop their infrastructure and services. Market worthiness focuses on the
institutions and processes that produce the financial outcomes that are the basis for
sustained and sustainable creditworthiness. The reform standard combines elements of
existing creditworthiness and service delivery agendas to outline a set of targets to improve
cities’ readiness to sustainably, effectively, access private finance for urban infrastructure
and services. The list of reform targets can also be used as a benchmark to assess current
24
2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P.
Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press.
gaps in city and state institutions, practices, and administrative performance that affect
cities’ ability to access private finance.
ULBs’ ability to access finance is clearly just one factor in development of India’s
municipal finance markets, but it is an important one. Cities clearly have to have the
motivation to do so – to choose to go to markets for finance on specific terms rather than to
other levels of government for loans or transfers. Investors may also need nudges to lend
the public sector as well, at least at first while risks are still being discovered. However, in
the long run cities’ ability to manage their finances and undertake investments
transparently enough to attract investment is a necessary foundation for sustainable
municipal finance markets.
25
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
Rationale
State or ULB
Action Required?
REVENUE
Coverage Ratio number of properties
paying taxes/estimated
number of properties
Collection Ability
Higher
measures tax
administration ability
ULB, though
requires
investment in
urban MIS.
REVENUE
Collection
Ratio
amount collected/amount
billed
Collection Ability
Higher
measures tax
administration ability
REVENUE
Outstanding
Property Tax
Gross Property tax
receivables ratio:
((Opening PT receivable +
closing PT receivable)/2) *
365)/demand for property
tax raised during the year.
Collection Ability
Lower
measures tax
administration ability
ULB, though
requires
investment in
urban MIS.
ULB, though
requires
investment in
urban MIS.
REVENUE
GIS database
YES/NO
of properties,
updated within
last 2 year.
Collection Ability
Yes
input for tax
administration, also check
on validity of coverage
ratio
1
ULB, though
requires
investment in
urban MIS.
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
Rationale
REVENUE
Administrative
Efficiency
% of property tax income
spent on collections
Collection Ability
Lower
outcome measure of
efficiency of tax
administration
REVENUE
Computerizati
on of demand
and collection
YES/NO
Collection Ability
Yes
proxy for cost of tax
administration
REVENUE
Self
assessment,
with auditing
and
punishment
YES/NO
Collection Ability
Yes
proxy for cost of tax
administration, require
audits in order to assure
reasonable quality.
REVENUE
Mandated
reporting of
transactions
used to assess
market value
YES/NO
Collection Ability
Yes
input for understanding
coverage ratio
2
State or ULB
Action Required?
ULB, though
requires
investment in
urban MIS.
ULB, though
requires
investment in
urban MIS.
ULB
Already
mandatory for
Stamp Duty, needs
to be enforced.
State action to
reduce Stamp
Duty may improve
quality of data
reported.
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
Rationale
REVENUE
Properties
updated in the
last 3 years?
YES/NO
Collection Ability
Yes
Essential for ensuring link
between property taxes
and city development.
Municipal acts allow
updates in valuation
every 3-4 years, most
ULBs do not actually
update.
REVENUE
Area rates
updated in the
last 3 years?
YES/NO
Collection Ability
Yes
Enables cities to adjust to
capture area
improvements based on
public investment
ULB, though
requires
investment in
urban MIS.
REVENUE
Expenditure
committed to
debt service
Expenditure
mandates
embedded in
Municipal Acts
loan service as % of
revenue
Liquidity
Lower
Reflects restrictions on
revenue.
ULB/State
comparative list
Liquidity
Reflects restrictions on
revenue.
State
REVENUE
3
State or ULB
Action Required?
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
REVENUE
Revenue
comparative list
restrictions
embedded in
Municipal Acts
Debt Service
Amount of cash flow
Coverage Ratio available to meet annual
interest and principal
repayments on debt as a
ratio of net operating
income over total debt
service payments.
Liquidity
Liquidity
>1 essential,
though too
high suggests
inefficient use
of cash
REVENUE
Earmarked
Funds
Pension, gratuity,
provident fund as a % of
revenue
Liquidity
Lower
Reflects structural
liabilities, higher may
indicate unsustainable
employee mix
State/Central
REVENUE
Property Tax
Methodology
ARV/Capital Value/ Unit
Area
Revenue Levels
& Growth
Unit Area or
Capital Value
Reporting on process
State
REVENUE
Details
Type of Criteria
4
Better
Rationale
Reflects restrictions on
revenue.
State or ULB
Action Required?
State
ULB/State
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
Rationale
REVENUE
Independence
of revenue
base
per capita own revenues
Revenue Levels
& Growth
Higher
Measure of insulation
from political risk at
higher levels of
government
REVENUE
Per capita non
property tax
own revenue
Non propertybased options
for revenue
Comparative list of other
revenue sources with
revenue potential.
Revenue Levels
& Growth
More
Comparative list provides
a benchmark for ULB
taxation powers
State/Central
Regularity of
reporting
Annual balance sheets and
financial ratios
Availability
Yes
Essential for an ongoing
picture of municipal
finances & financial
management
ULB, though
requires
investment in MIS
REVENUE
INFORMATION
Revenue Levels
& Growth
5
State or ULB
Action Required?
State
State/Central
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
Rationale
INFORMATION
Regularity of
reporting
Quarterly income and
expenditure statements,
cash flow statements
available online within 2
weeks of then end of the
quarter.
Availability
Yes
Essential for an ongoing
picture of municipal
finances & financial
management
INFORMATION
Establishment
of service-level
accounting to
track O&M for
services
YES/NO for water &
sewerage, SWM, public
transport
Availability
Yes
Enables investors to
understand cost structure
and sustainability of
various city activities that
funds may be directed to.
ULB, though
requires
investment in MIS
INFORMATION
Asset register
YES/NO
Availability
Yes
Enables investors to
understand financial
position of city
ULB, though
requires
investment in MIS
INFORMATION
Recording of
key financial
data in
English/Hindi
English/Hindi records of
specific financial indicators
Comparability
Yes
Reduces costs of
rating/understanding
ULB, though
requires
investment in MIS
6
State or ULB
Action Required?
ULB, though
requires
investment in MIS
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
Rationale
INFORMATION
Adherence to
common
accounting
guidelines
% Adherence to fund
codes prescribed by the
state
Comparability
Yes
Standardization of
financial information
lowers ratings costs and
eases comparisons
INFORMATION
Adherence to
common
accounting
guidelines
% Adherence to 2 digit
function codes prescribed
in NMAM.
Comparability
Yes
Standardization of
financial information
lowers ratings costs and
eases comparisons
ULB, though
requires
investment in MIS
INFORMATION
Modern
accounting
system
Adherence to double entry
accrual accounting
Comparability
Yes
Improved information for
decision-making,
comparable accounting
format across cities.
ULB, though
requires
investment in MIS
INFORMATION
Adherence to
common
accounting
guidelines
% Adherence to 4 digit
function, subfunction,
subsubfunction codes
prescribed by the state
Comparability
Yes
7
State or ULB
Action Required?
ULB, though
requires
investment in MIS
ULB, though
requires
investment in MIS
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
INFORMATION
Strong
independent
audit,
compliance,
risk
management
department.
Automation of
financial
accounting
Staffing profile and legal
powers of of state Local
Fund Audit department.
Quality
Paperless recording of all
transactions above
Rs.1000
Quality,
Availability
Staffed with
trained
accountants,
empowered to
obtain
information
from cities.
Yes
Zero paper
environment revenues and
expenditures
recorded
directly by
system rather
than from
ledger to
system
Does city have an egov
solution and standard
operating procedures that
require revenues and
expenditures to be directly
entered?
Quality,
Availability
INFORMATION
INFORMATION
8
Yes
Rationale
State or ULB
Action Required?
State
Less room for fudging
indicators, faster
processing time
ULB, though
requires
investment in MIS.
Less room for fudging
indicators, faster
processing time
ULB, though
requires
investment in MIS
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
Rationale
EXPENDITURE
Stability of top
leadership
Avg tenure of
Commissioner/equivalent
Institution
Longer
Stable but not stagnant
leadership mean projects
are more likely to
continue uninterrupted,
plans not change as
frequently.
EXPENDITURE
Financial
accounting to
support
decisionmaking
MIS to support
decisionmaking
Well defined functionary
and field codes in use
Institution
Yes
% of compliance with type
and frequency of MIS
reports listed in NMA
Training Manual
Institution
Higher
This is a way of
benchmarking functional
performance of the MIS,
not just leaving it to
whether there is an MIS
or not.
ULB though
requires
investment in MIS
Constitution of
District and/or
Metro
Planning
Committees
YES/NO
Institution
Yes
This is an indication of
ability and infrastructure
for regional planning,
essential to city growth
State
EXPENDITURE
EXPENDITURE
9
State or ULB
Action Required?
State
ULB though
requires
investment in MIS
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
EXPENDITURE
Regularity of
elections
Institution
Yes
EXPENDITURE
Human
resources
Human
resources
Real-time
information on
project/service
issues
State has supported and
city has held at least two
elections.
# engineers per capita
State or ULB
Action Required?
State
Institution
Higher
ULB in principle
# planners per capita
Institution
Higher
ULB in principle
existance of public
grievance system with
routing to departments
and consideration in work
plan
Time overruns
Institution
Yes
Grievances are a low-cost
source of micro-level
planning information.
ULB, though
requires
investment in MIS
Outcome
Higher
Reflects project
management ability
ULB
Cost overrun for
investment projects (avg?
frequency?)
based on service quality
achievements
Outcome
Higher
Reflects project
management ability
ULB
Outcome
Higher
Reflects historical ability
to execute projects.
ULB
EXPENDITURE
EXPENDITURE
EXPENDITURE
EXPENDITURE
EXPENDITURE
Project
Implementatio
n
Project
Implementatio
n
Ability to
provide quality
services
10
Rationale
Jessica Seddon
Market Worthiness
Draft: March 18, 2011
APPENDIX 1
Market Worthiness Targets
Category
Concept
Details
Type of Criteria
Better
Rationale
EXPENDITURE
Administrative
Efficiency
Establishment
Expenses/Total Income as
% of average for cities of
similar sizes
Outcome
<1
Reflects efficient use of
HR
EXPENDITURE
Administrative
Efficiency
Outcome
<1
Reflects efficient use of
HR
ULB
EXPENDITURE
Ability to
charge for
services
Outcome
Higher
The "market test" of
service quality
EXPENDITURE
Administrative
Efficiency
Administrative
Expenses/Total Income as
% of average for cities of
similar size
Collection efficiency for
water tariffs. (CE = 0 in
case water is not
chargable)
O&M/Gross fixed assets as
% of ULB average
Outcome
EXPENDITURE
Project
Implementatio
n
Utilization rate of funds
from centrally and state
sponsored schemes
Outcome
closer to the
mean for cities
of similar size
Higher
ULB/State
depending on
involvement of
parastatals.
ULB
11
State or ULB
Action Required?
ULB
ULB
Jessica Seddon
Market Worthiness
FIGURES
12
Draft: March 18, 2011